House Prices - The Long Term View

After a decade surfing clear turquoise seas, the Aussie housing market has hit a fizzling low tide. Led by Melbourne and Sydney, annual house price growth has shrunk from 10%+ early last year, to a lowly 1.2%. Since housing prices are an official national sport, this slowdown has many spectators. The above graph shows six national price downturns of over 5% in inflation-adjusted terms in the past 48 years — two since the GFC. It should remind us that markets move in cycles.

The holy trinity of inflation, employment and global events/shocks, shapes the RBA’s decisions on rates. Inflation is weak, employment is strong and despite late night tweets, trade war tension and the possible dark use of roubles, the global economy is in good shape and primed for growth. But, aside from rising interest rates, national house prices face six main headwinds:

a million interest-only loans transitioning to principal and interest

negative gearing reform if the ALP wins

retreating foreign buyers

growing calls to cut immigration

rising bank funding costs

a looming credit squeeze.

With RBA’s rates static, it’s doing little to lower borrowing costs and fire up demand; and global costs of money continue growing. It’s seems like many of us have forgotten that markets move in cycle….causing a few sleepless nights. No wonder. Australia’s housing market is worth $6.9 trillion and with the ratio of household debt to disposable income at a record 185%, it’s the largest store of wealth for most families. No-one wants blood on the streets.

But realistically, a short-term crash, or a sudden turnaround in prices is unlikely. More likely is a soft-landing as the seller’s market of the past few years becomes more balanced, and sustainable. Market corrections correct bubbles.